According to the extant literature (https://350.org/11-trillion-divested/), US$11 trillion has already been divested worldwide. But while it may seem a logical strategy, divestment will not lower demand for fossil fuels, which is the key to reducing greenhouse gas emissions. In fact, it may even cause emissions to rise.

The Issues:

At first sight, the argument for divestment seems straightforward. Fossil fuel companies are the main contributors to the majority of CO₂ emissions causing global warning (Scientific Consensus | Facts – Climate Change: Vital Signs of the Planet (nasa.gov). Twenty fossil fuel companies alone have contributed 35% of all energy-related carbon dioxide and methane emissions since 1965. Revealed: the 20 firms behind a third of all carbon emissions | Climate change | The Guardian

The argument goes that squeezing the flow of investment into fusel fuel companies will either bring their demise or force them drastically transform their business models. It makes sense for investors, too, as they avoid the risk of holding “standard assets”, fossil fuel reserves that will become worthless as they can no longer be exploited.

For companies heavily invested in coal, the most polluting fossil fuel, this rings true. Although new coal plants are still being constructed in countries such as China, India and Indonesia, predictions by majority energy agencies and industry alike indicate a steep decline McKinsey-Energy-Insights-Global-Energy-Perspective-2019_Reference-Case-Summary.ashx ) in its contribution to the global energy supply. With cleaner alternatives readily available, coal is no longer considered a safe long-term investment, and widespread divestment will only add to this sentiment.

When it comes to oil and natural gas, however, the picture looks quite different. Oil is used for a much wider range of products and processes (Frequently Asked Questions (FAQs) – U.S. Energy Information Administration (EIA)) than is coal, while the cleaner reputation of natural gas gives it significant appeal as a “bridge fuel” to a zero carbon economy, whether rightly or not (The EU wants to fight climate change – so why is it spending billions on a gas pipeline? (theconversation.com). As a result, the push for oil and gas divestment is likely to have unintended consequences.

The disinvestment paradox/troubles

The primary targets of the divestment movement are international oil companies (IOCs) – private corporations that are headquartered in Western countries and listed on public stock exchanges. ExxonMobil, Chevron, Royal Dutch Shell, BP, and Total are among the private oil “supermajors”.

Recent research (Does the Fossil Fuel Divestment Movement Impact New Oil & Gas Fundraising? by Theodor Cojoianu, Francisco Ascui, Gordon L. Clark, Andreas G. F. Hoepner, Dariusz Wojcik :: SSRN ) suggests that divestment can reduce the flow of investment into these companies. But even if the divestment movement were successful in reducing the economic power of these companies, IOCs currently only produce about 10 percent of the world’s oil (International Oil Companies: The Death of the Old Business Model | Chatham House – International Affairs Think Tank).

The rest is mostly produced by national oil companies (NOCs), i.e., state-owned behemoths such as Saudi Aramco, National Iranian Oil Company, China National Petroleum Corporation and Petroleos de Venezuela, located mostly in low- and middle-income countries.

Given that NOCs are less transparent about their operations Secretive national oil companies hold our climate in their hands | Environment | The Guardian ) that are IOCs, and that many of them are also headquartered in authoritarian countries, they are less exposed to pressure from civil society. As a result, they are dangerously under-scrutinised (National Oil Companies, with $3.1 Trillion in Assets, are Dangerously Under-scrutinized | Natural Resource Governance Institute), according to the Natural Resource Governance Institute (NRGI).

As they are state-owned, they are also not directly exposed to pressure from shareholders. Even the imminent public listing of Saudi Aramco ( Saudi Aramco’s $1.5 trillion IPO flies in the face of climate reality (theconversation.com) will only offer 1.5 percent of the company ( Subscribe to read | Financial Times (ft.com), and this will impose much less pressure to value environment issues. Environmental groups have urged Western multinational banks not to invest in the Saudi company ( Banks warned over Saudi Aramco by environmental groups | Aramco | The Guardian).

This means that while global demand for natural gas (https://www.iea.org/reports/gas-2019) and oil ( https://www.iea.org/reports/oil-2019) is still rising, and investments are insufficient to meet future demand (Global energy investment stabilised above USD 1.8 trillion in 2018, but security and sustainability concerns are growing – News – IEA ), divestment pressures are unlikely to impact the business plans of NOCs. As a result, instead of reducing global fossil fuel production, the divestment movement will simply force IOCs to cede market share to NOCs.

If anything, this would cause CO₂ emissions to rise. The carbon footprints of NOCs per unit of fuel produced are on average bigger than those of IOCs( CDP_Oil_and_Gas_Executive_Summary_2018.pdf (rackcdn.com).

IOCs are also generally better placed and more willing than are NOCs to reduce the carbon intensity of their products and support the transition to renewable energy (Oil and gas company strategies regarding the energy transition – IOPscience). They have, for example, led the way among oil companies in research into capturing and storing carbon, even if results have so far proven elusive.

Conclusion:

In a nutshell, the divestment movement will not reduce demand for oil and gas. It will transfer the supply of fossil fuel to companies that are more polluting, less transparent, less sensitive to societal pressures, and less committed to addressing the climate crisis ( Fossil fuel emitters and climate change: unpacking the governance activities of large oil and gas companies: Environmental Politics: Vol 26, No 4 (tandfonline.com).

What I see as the missing link

The divestment movement is understandably enjoying widespread appeal in a time of climate emergency. But by targeting the low-hanging fruit that are IOCs, the movement misses the more complex question of how to actually reduce the global demand for fossil fuels. To achieve that goal, the world would be better off creating a regulatory environment that forces both IOCs and NOCs to redirect their energies. For example, eliminating fossil fuel subsidies (4 Ways to Shift from Fossil Fuels to Clean Energy | World Resources Institute (wri.org) and putting a price on carbon (What is Carbon Pricing? | S&P Global (spglobal.com) would make heavily investing in renewables, already cheaper to produce than fossil fuels ( Renewable Energy Is Now The Cheapest Option – Even Without Subsidies (forbes.com), more attractive for all energy companies.

Such changes could also generate nearly US$3 trillion by 2030 ( https://www.wri.org/insights/4-ways-shift-fossil-fuels-clean-energy) for governments globally. These funds could be used to massively scale up renewables ( https://www.nature.com/articles/s41560-019-0365-7) prioritise the development of energy storage to address the intermittent nature of such power, and improve energy efficiency in industry, transport and housing, which will make fossil fuels increasingly redundant.

While IOCs now produce much less fossil fuel than they used to, they still have huge among of expertise ( How the Oil and Gas Industry Is Contributing to Sustainability (spe.org) that could be applied to the energy transition ( Full article: The oil and gas sector: from climate laggard to climate leader? (tandfonline.com). In my view, rather than transferring power to less environmentally conscious NOCs, we should make use of them. As for those with shares in fossil fuel companies: they must exercise their powers as a shareholder to pressure them to support the energy transition as constructively and ethically as possible. Their influence matter greatly.